Sofíía Dithurbide 1

November 3th, 2015

Candidate name María Sofía Dithurbide

Teacher Cristina Goutmann

Title of article The High Cost of Dirty Fuels

http://www.nytimes.com/2015/05/21/opinion/the-
Source of article high-cost-of-dirty-fuels.html (

Date the article was published May 21, 2015

Date the commentary was written November 3th, 2015

Word count (750 word maximum) 740

Section of the syllabus the article

Section 1: Microeconomics
relates to

Candidate number
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Criterion A Diagrams

Criterion B Terminology

Criterion C Application
Criterion D Analysis
Criterion E Evaluation
Total

The High Cost of Dirty Fuels

By THE EDITORIAL BOARD

A new report from the International Monetary Fund makes a compelling case for why
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countries should end subsidies for fossil fuels: It would save millions of lives.
Governments subsidize energy in many ways. Some countries sell gasoline and diesel
at prices lower than the cost of producing or importing those fuels. But by far the
biggest way countries reduce the price of energy is by not taxing it enough to account
for the damage that burning fossil fuels causes to human health and to the climate.

The I.M.F. estimates that calculated properly, energy subsidies will amount to $5.3
trillion this year, or 6.5 percent of the global gross domestic product. China, the largest
emitter of greenhouse gases, will be responsible for nearly half of that amount, or $2.3
trillion, and the United States will be the second biggest at $699 billion.

The arguments for cutting subsidies are not new. But the I.M.F.’s exhaustive research
makes the case even stronger and more timely. The fund calculates that by raising
taxes on fossil fuels, basically eliminating the subsidies, nations would reduce
premature deaths caused by air pollution by 55 percent. That would make a big dent in
the 3.7 million premature deaths that the World Health Organization links to all
outdoor air pollution for just 2012.

The climate would also benefit by reducing greenhouse gases. Eliminating subsidies,
the I.M.F. estimates, would cut emissions of carbon dioxide, the main greenhouse gas,
by more than 20 percent a year. Another benefit would be to increase government
revenue, which could be used to invest in health care, renewable energy, mass transit
and other public services.

It would be naïve to expect most governments to completely eliminate energy

subsidies. But there are reasons to be hopeful that public officials are becoming more
willing to discourage the use of fossil fuels. Last year, for example, the Indian
government stopped subsidizing the retail price of diesel to reduce its budget deficit.

Meanwhile, China is trying to reduce coal use for electricity generation in an effort to
improve the abysmal air quality in Beijing, Shanghai and other big cities. In the first
four months of this year, that country lowered its coal use by 8 percent compared to
the same period last year, according to calculations by Greenpeace.

The recent sharp drop in the price of crude oil, coal and other fossil fuels provides an
opening for governments to raise energy taxes, because any increase would have a
much smaller impact on consumers than it would have had a year ago. In the United
States, states like Iowa and Utah have raised gasoline taxes to help pay for road
repairs. Congress should also raise the federal excise tax of 18.4 cents per gallon on gas
and 24.4 cents on diesel, which has not been increased since 1993, and use the money
for road, bridge and transit projects.

There is no good reason for governments to sustain outdated and unnecessary

subsidies that cause millions of deaths every year, not to mention the havoc that they
are wreaking on the environment.
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November 3th, 2015

The article talks about fossil fuels use, how their impact on society makes it

necessary to cut subsidies on them and impose taxes, as their consumption and

production generates negative externalities.

Negative externality of production is “when the actions of producers give rise

to negative side-effects on other people who are not part of these actions, and whose

interests are not taken into consideration” 1. As shown in DIAGRAM 1 this is when the

marginal social cost, MSC (the costs that the society has when producing a product), is

greater than the marginal social benefit, MSB (the benefit that the society has by

consuming a product), at the point of production Q*. The free market doesn’t take into

1
Tragakes, E. (2011). Economics for the IB Diploma, Second edition. Italy: Cambridge University Press.
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consideration the external cost so there is over allocation of resources to the production

of the good. This is what is happening with the use of fossil fuel production, as the

government is not taking into account “the damage that burning fossil fuels causes to

human health and to the climate.” 2 The diagram 2 shows that, in order to achieve social

optimum and allocative efficiency, there should be a decrease in production and

produce at Popt, Qopt.

Diagram 2 illustrates the effects of the subsidy, which is “assistance by the

government to individuals or group of individuals” 3, in fossil fuel energy.

After it, the supply curve shifts downwards from S1 to S2, which leads to a

decrease in price from P* to Pc and an increase in quantity supplied and demanded

2
Quote from the Artice; The High Cost of Dirty Fuels.
3
Tragakes, E. (2011). Economics for the IB Diploma, Second edition. Italy: Cambridge University Press.
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November 3th, 2015
from Q* to Qsb, creating a greater gap between what it is produced and the optimum

quantity, Qopt. As there is more carbon dioxide produced, the subsidy creates a larger

over allocation of resources as well as a greater negative externality.

The solution suggested is to cut off the subsidy (Diagram 3). This will cause an

upwards shift of the supply curve from S2 to S1, a decrease in the quantity supplied and

demanded from Qsb to Q* and a price increase from Pc1 to p*. It will “cut the emissions

of carbon dioxide, the main greenhouse gas, by more than 20 percent a year” 4, shown

by the External Cost decrease from 1 to 2.

The next suggestion is the imposition of a tax. A tax is “a payment imposed on

particular goods and services”5. This imposition, also shown in diagram 3, shifts the

supply curve upwards from S1 to S3, which causes a price increase from P* to

4
Quote from the Artice; The High Cost of Dirty Fuels.
5
Tragakes, E. (2011). Economics for the IB Diploma, Second edition. Italy: Cambridge University Press.
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November 3th, 2015
Pc2=Popt, a decrease in quantity produced and demanded from Q* to Qt=Qop, and

finally reaches the social optimum quantity. By achieving allocative efficiency all external

costs are covered.

Producers, consumers and workers will be worse off due to the following

reasons: Consumers will have a wide increase in price and a huge fall in quantity

consumed from Qsb,Pc1 to Qt,Pc2. Producers will deal with a vast drop in revenue from

QsbxPp1 to QtxPp2. As firms will have a decline in output, from Q* to Qt, they will need

to reduce costs by employing fewer workers as less are needed, raising unemployment.

Due to the tax, government will be better off as spending goes from (Pp1-

Pc1)xQsb to zero, and revenues from zero to (Pc2-Pp2)xQt. Extra revenue will allow “to

invest in health care, renewable energy, mass transit and other public services.” 6

Society as a whole will also be better off as they will achieve allocative efficiency by

producing at optimum quantity, Qt, eliminating negative externalities of production.

However, taxation is a short term solution because it causes severe drop of

production and therefore a limit in the economy growth. Producers and the government

should think in a long term alternative. The governments should incentive the firms to

switch to other renewable energy supply by the combination of, carbon dioxide emission

tax and a subsidy to substitute energy such as wind, solar, geothermal, hydroelectric or

6
Quote from the Artice; The High Cost of Dirty Fuels.
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biomass. As a result, producers will start to consider spending money in other types of

energy resources in order to increase production and revenue.